An installment loan is when you borrow money from a lender, agree to the terms and conditions of repayment plus interest over a series of monthly payments. Installment loans come under many different names like a personal loan, home equity loan or installment loan.
An installment loan is a great way to pay for your home, auto, education and any other item you may require. The amount you can borrow will depend on your credit score and overall financial health.
Here is an example of a typical installment loan
$5,000 loan over 36 months at 10% interest. With this loan, you would make 36 equal monthly payments or equal monthly installments of $161.34 / month. At the end of the 36 month period, you paid $808.09 in interest fees to the lender for the use of their capital.
The Process to Qualify for an Installment Loan
A lender will request your credit score, your income (may ask for copies of a pay stub), and your debt-to-income (DTI) ratio. The lenders will review your DTI to see if you can afford the additional monthly payment. Here is a list of items that may be requested:
- You will need to be a minimum of 18 years of age
- A US citizen. Some lenders will work with a working visa
- Work History
- Personal Net Worth Statement may be requested from Banks and Credit Unions
- Who is your current employer and can they supply a letter of employment (Mortgages, second mortgages, home equity loans and HELOC's may require this)
- Debt To Income ratio
Your net worth is everything you own (assets) minus what you owe in debts (your liabilities). Your assets will include your home and other properties, cash, stocks and investments, vehicles or any other items of value. Debt or liabilities are what you owe on the assets. Items like your mortgage, car payments and student loan debt. The difference between your assets and liabilities is your networth. Your networth statement is your personal scorecard of how you're doing.
Debt To Income Ratio
Your debt-to-income or DTI is a comparison of how much you owe every month to how much you earn monthly. It's the percentage of your gross monthly income (before taxes) that goes towards payments for rent/mortgage, personal loans, and Student Loans.
Applying for an Installment Loan
Your credit score will be the first question asked by any lender when you apply for a loan. Everyone is provided a free annual credit report to check your credit with all three credit bureaus, TransUnion, Equifax, and Experian. Check your credit score and read through it carefully to make sure that there are no charges or mistakes that you are unaware of.
If you have credit cards carrying a balance, we would recommend looking into a 0% balance transfer credit card offers before you applying for a loan. With good to excellent credit, the credit card providers are offering 15 to 21 months of 0% interest on balance transfers. This will drop your overall monthly payments.
Lenders usually request your debt-to-income ratio and paying down or transferring the balance before applying for new financing can make a big change in your DTI. When you have a better debt-to-income ratio, it will provide the lenders the assurance that you can manage the new monthly payment and you may be offered a better interest rate.
Where to Apply for an Installment Loan
If you decide to shop online for a personal installment loan the online market is very competitive. Make sure to compare the lenders to be sure you are getting the deal you are looking for. Your credit score is going to dictate the interest rate offers.